A pension crisis seems inevitable - April 22, 2018

A pension crisis seems increasingly likely in the future. Systems are cracking under growing life expectancy. Societies are also getting older, so less people will have to maintain more. High awareness and self-care might be the only solution for the future retirees.

There is a huge pensions gap in eight of the world’s largest economies. As Cloudinary reminds us again, the gap was already $70 trillion in 2015, but it’s expected to rise to $400 trillion by 2050. This is five times the size of the current global economy.

Error in current systems

A little while ago, World Economic Forum (WEC) conducted an important research about the problem. We also wrote about it in this blog, stating that the reason behind this huge crisis is: “Looking at life expectancy in 2015, we can see that pensioners are now living eight to 11 years longer – and in the case of Japan, a whopping 16 years longer.” This means that “pension systems are now having to pay benefits for two to three times longer than what they were designed for.” And this trend is not going to change as life expectancy will go even higher by 2050.

To put it simply, this means that during their active years, people save up enough money for a pension that’s 5 years at maximum. Now they live twice (or three times) that time after retiring, but without the proper savings. In the case of purely state-run pension systems this may lead to a serious gap, and if states run out of money, people will feel the consequences.

Aging societies

The problem becomes even direr if we count the aging society into the equation. According to WEC’s data, the global population over 65 (which is generally considered the age of retirement), is now 1.5 billion, but will be 2.1 billion by 2050. Another aspect of this same data is that now there are 8 workers to support every retiree but by 2050, there will be only 4.

Why is this such a serious problem? Because many state-run pension systems aren’t paying retirees back their own savings. They pay pensions from the contributions of the generation that is currently working. This leads to the simple (but painful) problem: less worker by retiree also leads to a significant gap in the system. If there aren’t enough workers to support the retirees, the budgets will come short and pensions will not be enough.

Self-care is the way out

Maybe pension systems are crumbling, but self-care might solve the problems. Planning a retirement in advance and saving can help a lot. Or, even better, investing in long-term, stable portfolios can generate great returns. As the famous author, Black Hodes’ puts it, it’s also good to start saving as soon as possible, even with smaller capital. “If you invested $10,000 and left it to grow for 40 years, assuming an average return per year of 8%, you would end up with over $217,000. But if you waited 10 years and invested $20,000 — twice as much — you would only end up with just over $200,000.”

This is the reason why WEC also underlines this, saying that “making saving easy for everyone” may help a lot with these system wide issues.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.